Sebi clamps down on derivative markets; algo trading made more accessible

The Securities and Exchange Board of India (Sebi) on Wednesday tightened the derivative markets framework to curb the excessive speculation and prevent small investors from entering the high-risk space. The market regulator, at its board meeting held on Wednesday, also accepted majority of the recommendations made by the Uday Kotak Committee on corporate governance but deferred decision on key proposals such as one on sharing of information with promoters.
Sebi announced steps to make algorithm trading more accessible and reduced the cost of buying equity mutual funds. It also proposed to introduce a new compliance framework for stocks undergoing insolvency proceedings and an “entirely new” set of buy-back regulations.
To ensure derivatives and cash market move in sync, Sebi enhanced the eligibility criteria on stocks allowed to trade in this segment. It further said stocks that don’t meet certain criteria will compulsorily have to be physically-settled. Currently all futures and options (F&O) contracts are cash-settled without any physical delivery. Around 209 stocks are currently traded in the F&O segment, which market players said will reduce following Sebi’s latest measures.
Sebi also introduced the concept of ‘product suitability’ under which investors will have to demonstrate income or knowledge proof to deal in the derivatives segment. According to the new framework, individual investors can take free exposure to markets (both cash and derivative) only up to a certain amount which would be decided based on their total disclosed income as per tax filings. In cases investor chooses to take exposure beyond the specified limit, Sebi has directed brokers to undertake rigorous due diligence and collect appropriate documentation.
“There is over speculation in the (derivatives) market. We are better off without it. We don’t want to spoil our market,” said Ajay Tyagi, chairman, Sebi.
Sebi approved 80 recommendations made by Uday Kotak Committee on corporate governance without any modification. Another 15 other were approved with modifications while eight others were referred to other respective agencies.
Some of the key proposals accepted include limiting maximum number of director positions an individual can hold at listed companies, enhanced disclosure of related party transactions (RPTs) and utilization of funds.

Among the suggestions which have been accepted with modifications include split of roles of managing director (MD) and chief executive officer (CEO), mandatory shareholder approval for royalty payments and one woman director in Top 500 companies. However, one of the important recommendation around sharing of price sensitive information with controlling promoters has be shelved.
Sebi has also proposed to reduce the additional expenses that fund houses are allowed to charge of the daily net asset value of schemes. Currently, rules allow MFs to charge additional expense ratio of up to 20 basis points (bps) which was proposed to be reduced to five bps.
Sebi clamps down on derivative markets; algo trading made more accessible Vidya Bala, head-mutual fund research, FundsIndia said that the impact of a cut by 15 basis points for individual investors is likely to be rather limited because returns are significantly higher, especially in equity schemes. However, the move does contribute towards making mutual funds stand out better.
“Such moves can help make mutual funds more attractive to investors compared with other market linked products,” she said.
Sebi has also put out a discussion paper on special regulations for listed firms undergoing insolvency proceedings under Insolvency and Bankruptcy Code (IBC).
In the paper, the market regulator would propose trading curbs companies under IBC. It would prescribe a framework on sharing of information, reclassification of promoters, compliance with minimum public shareholding norms and delisting pursuant to liquidation. Sebi said it also re-write the rules for share repurchases and ease Takeover Code regulations.
Sebi has also reduced the costs involved in availing colocation (colo) services by allowing the facility to be shared between trading member. This will help even smaller brokers to use the colo facility and bring level-playing field between all the brokers. The market regulator has also asked exchanges to provide tick by tick data free of cost to all members. Further, Sebi has decided to penalise all the algo orders that have been placed beyond 0.75 per cent of the last traded price of the stock. Currently the cap is one per cent of the last traded price. Sebi has also asked exchanges to publish minimum and maximum latencies and provide a simulated market environment for testing of algo software.
To encourage more participation of angel funds, Sebi amended the Alternate Investment Fund (AIF) regulations by increasing maximum investment amount in venture capital undertakings. Regulator has also made the penalties steeper for companies which violate listing regulations.
“The earlier Sebi discussion paper on algo had suggested quite a few regressive measures such as minimum resting time, frequent batch auctions, random speed bumps and randomisation of orders. The measures announced today seem more progressive,” said Harjeet Singh, consultant, department of economic affairs, ministry of finance.

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Sebi clamps down on derivative markets; algo trading made more accessible

Sebi may impose trading curbs on cos undergoing insolvency proceedings

The Securities and Exchange Board of India (Sebi) may impose trading restrictions on shares of companies that are undergoing insolvency proceedings. The move, which is also a demand by industry players, is aimed at reducing volatility in stock prices and curbing manipulation or misuse of price-sensitive information.
Sources said the market regulator would lay down a compliance framework for listed companies undergoing insolvency resolution. The announcement will likely be made at Sebi’s board meeting next week. The Sebi board may also announce more checks and balances on algorithmic (algo) trading, reduction of mutual fund costs and changes in buyback and takeover regulations.
Sebi is likely to propose new rules for fiduciaries, such as lawyers and chartered accountants, dealing in the securities market but who are not registered with the market regulator.
As part of the new framework for firms undergoing insolvency, Sebi is likely to provide several relaxations, including exemptions from minimum public shareholding norms and doing away with tedious reverse book building process for delisting. Sebi will allow the new promoters to breach the 75 per cent shareholding cap in order to infuse equity into the company. Such promoters will have more time to reduce their holding to the threshold of 75 per cent.
Further, Sebi could mandate higher disclosures prior to debtors moving the National Company Law Tribunal (NCLT) and ask debtors to disclose the demand notice and invoice copy involved in the bank default.
The move comes after Sebi received requests from stakeholders, especially banks, to relax certain regulations in line with the newly enacted Insolvency and Bankruptcy code. This will be the second round of relaxations for companies undergoing insolvency proceedings. Previously, Sebi had exempted buyers of insolvent companies from making an open offer to minority shareholders during a takeover.
On algo trading, Sebi may impose high transaction charges on brokers or trading members availing the co-location facility at stock exchanges. According to sources, the regulator is likely to introduce a “surge charge” for traders whose order-to-trade ratio is high. The charges could be as much as four times the normal charges, depending on certain parameters, including trading time. The provision was taken up by Sebi’s expert panel on the secondary market earlier this month.
Additionally, Sebi plans to issue a draft consultation paper on role of fiduciaries in line with recommendations of the Uday Kotak expert panel on corporate governance.

These fiduciaries include chartered accountants, company secretaries, cost accountants and monitoring agencies. The proposed regulation will include disclosure of conflict of interest, reporting all material discrepancies in certificates and audit reports, and compliance with all Sebi regulations. “Penalty could include warning, adjudication proceedings, prosecution, disgorgement, suspension, and a ban from taking further fiduciary assignments,” said a person privy to the development. Sources said this would be in addition to the existing obligations of fiduciaries. This move comes in the wake of fraudulent activities at Punjab National Bank and Fortis Healthcare, where fiduciaries such as chartered accountants failed to discharge certain duties.
Sebi also plans to reduce the additional expenses that fund houses are allowed to charge on the daily net asset value of schemes. Currently, the rules allow mutual funds to charge an additional expense ratio of up to 20 basis points, which could be reduced to 5 basis points. This move will help bring down costs of investing in mutual funds. The market regulator, however, may provide fund houses some leeway by introducing a ‘green initiative’.

Sebi may impose trading curbs on cos undergoing insolvency proceedings

I-T Dept says no to Sebi plea for tax exemption for unified broking licence

Indian tax authorities are not willing to concede the request of market regulator Securities and Exchange Board of India (Sebi) to provide one-time tax exemption to trading members of stock and commodity exchanges to do both businesses under one entity.
According to a tax official, such consideration could peg loss to the exchequer in a scenario when India is already grappling with revenue shortfall due to steps taken by the government such as the implementation of goods and services tax and demonetisation. Currently, the government is evaluating exemption on long-term capital gains tax which has now been withdrawn to minimise economic distortions and curb erosion of tax base.
Tax implications is a major hurdle for brokers to opt for unified licence regime. The change was notified in July 2017, by amending the Securities Contracts (Regulation) Rules and Sebi (Stock brokers and Sub-Brokers) (Amendment) Regulations. Since then not a single broking firms have executed the concept.
Sources say, brokers had made several representations and requested market regulator to grant tax exemption. “The issue has been raised in the recent meeting where brokerage houses expressed their apprehensions on having a single entity. According to them, to adopt the concept they have to either acquire the entity or merge their subsidiaries. If they acquire the commodity segment or vice versa, they have to shift their client base accordingly. While, if they follow merger process they are bound to pay capital gains tax and stamp duty as the underlying assets, including securities and fixed assets, will undergo a change in ownership.
Currently, most brokerages have separate arms for equities and commodity derivatives trading.
Explaining the reason, a broker said, transfer of securities held for less than a year into the merged entity will attract short-term capital gains tax of 15 per cent.

Any profit arising from the transfer of an asset or change in ownership will also face capital gains tax. Fixed assets owned for more than two years will attract 20 per cent capital gains tax adjusted for cost inflation. If the fixed assets are owned for less than two years, the gains will be treated as income of the individual or company. Besides, brokerages will also be subject to stamp duty during new registration, the amount of which will be decided according to the state laws, he added.
To keep it simple and viable, the trading members are contemplating surrendering the existing license and go for a fresh application rather transferring the assets or follow the lengthy procedures,” said a member, broker forum privy to the development.
As per the Sebi guidelines, a one-time certificate of registration as stock broker/clearing member shall be granted by the regulator.
Subsequent permission to act as a stockbroker or clearing member of other exchanges or clearing corporations shall be granted by the respective bourse or clearing corporation, after scrutiny. Sebi’s prior approval will be required by the broker only in cases where an integration would lead to change in control of the stock broker/clearing member.
Following Sebi rules, National Stock Exchange (NSE) had also issued a circular to brokerages which explained the process of filing an application to get the unified licence number. “A few application has come but its awaiting approval due to the compliance issue, said another person in know.
To provide better synergies, Sebi plans to have common intermediaries for both segments. To begin with, the regulator has proposed common brokers. It had also proposed universal exchange which would benefit the NSE, the BSE, and the Multi Commodity Exchange (MCX), which currently trade in either of the two categories.
Quick Glance

Sebi notified unified licence regime in July 2017
Regulator had put out guidelines in Sep 2017
No migration happened under the new regime
Brokerages have expressed apprehension over tax implications
Brokers might surrender the existing license and go for a fresh application
Transferring the assets or merger of the subsidiaries would follow the lengthy procedures

I-T Dept says no to Sebi plea for tax exemption for unified broking licence

Sebi plans safeguards for overseas investors taking private bank route

The Securities and Exchange Board of India (Sebi) is planning checks and balances on overseas investors taking the ‘private bank route’ to invest in domestic markets.
The move comes after several industry players expressed concerns that the new route allowed by the Sebi could be misused by investors, such as participatory notes (p-notes).
Last week, the Sebi – through a circular titled “Easing of access norms for investment by foreign portfolio investors – allowed clients of private banks to trade in the Indian equities without having to register with the market regulator.
While the Sebi has only given an in-principle nod to the proposal, regulatory sources said a fine print of the framework will be released by Sebi in the next one month.
“I want to assure that the Sebi will put enough safeguards so that the route is not exploited. Only the banks which are ready to forego their client confidentiality agreements will be allowed to use the route,” said a Sebi official.
It is also learnt that the Sebi will keep the investment structure tight — a stark difference from p-notes. Sources said the Sebi will only permit omnibus structures for the route.

In such a structure, a private bank will be allowed to have only a single portfolio and all the investments will be channelled through the same.
“We will not allow segregated portfolio for the framework as it could be misused. Only fund structures will be permitted and there will be a common portfolio,” the official cited above said.
On a positive note, the Sebi is planning to keep the route open for all classes of investors, including institutions and individuals.
Interestingly, there seems to be a stark departure in the Sebi’s view on indirect participation of foreign investors in Indian markets.
“Indirect participation is not a concern for us as long as we have information of the end beneficial owner,” a Sebi official said.
Among other developments, the regulator seems to have taken a final call on issuance of p-notes from international financial services centres (IFSCs), such as the GIFT City in Gujarat. It is learnt that the Sebi is not inclined to allow p-note issuances from the GIFT City.
The proposal has been under the regulator’s consideration for the past one year as some of the big-ticket foreign institutions were keen on having such a framework. It could be very useful especially in the current circumstances where foreign funds have been stripped of p-notes and the Singapore Stock Exchange (SGX) route to invest in the Indian futures market.

Sebi plans safeguards for overseas investors taking private bank route

Sebi eases access norms for investment by foreign portfolio investors

The Securities and Exchange Board of India (Sebi) has opened up the Indian capital markets to clients of global private banks, which can invest in stocks without having to go through registration or compliance requirements.
Until now, foreign banks were allowed to do propriety trades only. However, now they have been allowed to invest in domestic securities on behalf of their clients.
Sebi announced the move last week in a circular titled “Easing of access norms for investment by foreign portfolio investors”.
Experts say the new measure, which resembles the participatory note (p-note) framework, could be a game changer.
Also, this route will provide more flexibility to investors compared to p-notes, as they will be able to take unhedged exposure to Indian derivatives market.
Sebi’s latest move is a departure from the regulator’s efforts in the past few years to encourage direct participation.
All big-ticket p-note issuing entities are owned by banks such as Citi, JPMorgan, BNP Paribas, and Credit Suisse. These banks can now direct their clients to invest through their wealth management arms rather than taking the p-note route.
“Allowing private banks to invest on behalf of their clients has been a long-standing industry demand. In the current scenario p-note subscribers could migrate to this route and trade freely in the Indian derivatives market. The compliance requirement is also expected to be less if an investor comes through a bank,” said Rajesh Gandhi, partner, Deloitte India.
Private banks fall under Category-II foreign portfolio investors (FPIs) and face fewer restrictions and no withholding tax because they are considered “appropriately regulated” entities.
Experts say family trusts and wealthy investors, who come under Category-III FPIs, could invest through banks and avail of beneficial treatment.
Private banks are a major class of institutional investors worldwide because of their wealth management arms, which cater for institutions, family trusts, and individual investors.
Mid- and small-sized investors, whose exposure to the Indian markets is currently minimal, could prefer this route.
“Private banks manage a significant portion of global wealth. Because of the earlier restriction, a lot of investors went to other countries even though they had an appetite for India,” said Suresh Swamy, partner, PwC India.
Citing excessive speculative trading in the derivatives market, Sebi banned p-note subscribers from taking any unhedged positions in the futures market last year.
Following concerns about money laundering through p-notes, expressed by the Supreme Court-appointed special investigation team, it had tightened ‘know your customer’ norms for p-notes in 2016.

P-note issuers were asked to follow Indian anti-money laundering laws.
However, the circular on private banks doesn’t have any such provisions, meaning less compliance burden. There are two broad conditions these banks should meet. One, they should not have secrecy arrangements with the investors. Two, the banks should know who the end beneficiary of the account is, and Sebi has the right to know about it.
Overseas funds have been spooked by several policy measures taken by the government in the past few years.
Experts say moves such as the reintroduction of the long-term capital gains tax and enacting General Anti-Avoidance Rules (Gaar) have affected investor sentiment. They say these decisions have reduced the attractiveness of India as an investment destination.
FPIs would welcome Sebi’s circular, experts said.
MARKET SHIFT
• Securities and Exchange Board of India (Sebi) permits foreign investors to invest in Indian markets through private banks
• Investors using this route will not be required to register directly with Sebi
• The framework bears resemblance to the participatory note (p-note) framework
• Also investors coming through private banks will be able to take unhedged positions in derivatives, which p-note users are not allowed to do
• Foreign individuals and family trusts under Category-III foreign portfolio investors can also avail this route to get beneficial treatment
• Experts believe the move will be a game changer in attracting more offshore fund flows

Sebi eases access norms for investment by foreign portfolio investors

Sebi working with FinMin on new framework on algorithm trading

The Securities and Exchange Board of India (Sebi), in consultation with the finance ministry, is expected to reissue fresh guidelines on high-frequency trading (HFT), popularly known as algorithm trading, after taking feedback from market participants.

According to sources, the earlier proposal to tighten the algo trading rules, which had been put out by Sebi in August 2016, has been dropped by the ministry. The market’s contention was that the rules were framed without taking all aspects into consideration, were not in line with global practices, did not have sufficient checks and balances, and would have had an adverse impact on liquidity.

To review the proposed norms, Sebi constituted in August last year a committee on fair market conduct to suggest measures to improve surveillance of the market and strengthen the rules for algo trades.

 

“We have received several proposals and will soon put out final guidelines in this regard,” said a person privy to the development.

“Sebi’s new proposal would bring standardisation of the co-location (colo) facility. Most of the measures proposed earlier were regressive in nature. The new framework would be progressive in terms of equitable access without impacting liquidity,” said a source.

In 2015, Sebi began investigations after it received multiple complaints that some brokers had allegedly got preferential access to the National Stock Exchange’s (NSE’s) colo facility. According to the source, the consultation paper is being prepared keeping in mind the best global practices and considering cost benefit analysis, which was not effectively done in the previous proposal.

Sebi’s new framework would ensure that liquidity is not impacted. For that, the regulator may put a cap on “order to trade ratio” to give level playing field. This could be done by formalising market maker scheme.

“To improve liquidity, the regulator should formalise the market-making scheme. There should be differentiated treatment and regulation in terms of market participation. The regulator should economically incentivise market makers rather than disincentivising all market participants uniformly,” said Harjeet Singh, consultant, department of economic affairs, ministry of finance.

Under the revised proposal, the regulator is said to be focusing on a real-time surveillance system so that it could get minute-by-minute surveillance of algo trades and, thereby, detect and prevent malfunctioning.

This could be done by improving the existing infrastructure and ramping up the systems by having an advance template of superior technology.

Currently, there is no structured data available at a prescribed time interval to provide real-time feed for surveillance.

Besides, Sebi also wants to have standarisation of colo facility, so that all participants would have fair and equitable access. “Publishing real-time colo-based latencies would help bring in transparency as well as provide benchmarking against global exchanges,” said Singh.

The regulator is not in favour of allowing retail participation in HFT at present. “It is not advisable as it would be highly risky for individual investors to use automated trading systems. The regulator wants to have guidelines in place first and it could perhaps consider domestic individual investors at a later stage,” said one of the sources cited above. Sebi also plans to address and mitigate the chance of flash crash and fat-finger trades.

Algo trading is a software programme designed to execute automated trades on fulfilment of certain criteria. These are typically trading strategies that make use of complex mathematical models. The most common is arbitrage, which tries to profit from differential pricing of the same security at the same time on different exchanges. According to the Sebi data, a little over 80 per cent of the orders placed are generated by algorithms. Such orders contribute to about 40 per cent of the trades on exchanges (not all orders result in trades).

The review of the HFT regulation was triggered by the NSE co-location controversy, where some brokers and officials allegedly made illegal gains through preferential access to the server. After the controversy, Sebi had published a discussion paper and had proposed seven ways to level the playing field between HFT traders and others. These included revising the order sequence, introducing a minimum resting time between HFT orders, and uniform access to market data.

Sebi working with FinMin on new framework on algorithm trading

Sebi launches search operation in WhatsApp earnings leak case

The capital market regulator Securities and Exchange Board of India (Sebi) has launched a massive search operation in connection with WhatsApp earnings leak case.

Confirming the development, a regulatory official told Business Standard that about 34 people have been identified and are being searched. These people are company officials, brokers and entities who allegedly gained out of the earnings information which was made public in advance.
Nearly 100 Sebi officials and policemen had been deployed for the search operation, which is being done in coordination with the Mumbai police. The search operation will continue for two days, said official cited above.

Last month, Sebi had initiated a probe against dozen odd companies including—Dr Reddy’s, Cipla, Axis Bank, HDFC Bank, Tata Steel, Wipro and Bajaj Finance. The other five were Mahindra Holidays and Resorts, Crompton Greaves Consumer Electricals, IT services providers Mindtree and Mastek, and India Glycols, a petrochemicals company.

According to the sources, around five companies, whose price-sensitive information had leaked on social media, are under investigation. However, BS could not ascertain the five companies under the current Sebi search operation lens.

These five companies have been identified after analysing and examining their trade data of the last 12 months. Further, it had matched the leaked earnings with the actual results of the September quarters to detect a possible breach of Prohibition of Insider Trading (PIT) norms.

Sebi launches search operation in WhatsApp earnings leak case